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Iceman Draghi Keeps Euro Exchange Rates on a Steady Footing
The ECB disappointed those hoping for a stronger Euro today by quashing rumours that the Bank was planning to slowly start withdrawing stimulus from the Eurozone economy.
Policy makers at the European Central Bank (ECB) delivered their October policy decision in Frankfurt on Thursday and the reaction by the Euro suggests markets were left with no concrete takeaways concerning future policy.
If ever a central banker wanted a masterclass in keeping markets steady during a much-hyped press conference, then knock on Mario Draghi’s door.
The ability of Draghi to quash rumour and keep expectations steady on future policy is impressive.
At no point during the ECB President’s press conference did he give any hints at future actions.
This ensured exchange rates and interest rates were not rocked by the event which will please the Bank.
Talk of tapering was dismissed as a, "random statement from somebody who didn't know anything about that”.
Scarcity of bonds to purchase in the quantitative easing programme was described as not a problem and if anything the programme continues to run smoothly.
The euro rallied temporarily and bunds sold off after Mr Draghi said that the Governing Council did not discuss an extension of QE beyond next March and that extraordinary policy support won’t last forever.
"The comments sounded quite neutral to us and, in fact, the Euro subsequently gave up all of its gains," says a client briefing from Lloyds Bank following the event.
Any moves in the Euro at this stage we would therefore attribute to positioning and technical considerations.
EU Summit: British Pound Soft v Euro, Dollar as May Reiterates Call for Control Over Borders AND Free Trade in Upcoming Brexit Negotiations
Pound Sterling is on the defensive as Theresa May offers no substantive indication that she is willing to agressively seek Brexit deal that offers UK unfettered access to the EU's single market.
GBP is in retreat in the final session ahead of the weekend.
Declines are particularly notable against the US Dollar - but we would point out that the USD is on a bit of a rampage at present so the lion’s share of the move lower in GBP/USD has the US Dollar’s strength to thank.
The Euro is also being punished by the bigger Dollar and is around evens against the Pound.
It would appear that this week’s recovery rally in Sterling is at risk with the headlines from the European Council having so far failed to provide the currency with a lift.
Theresa May has told a media briefing that she has told European leaders that she will push for free trade in goods and services at upcoming Brexit negotiations.
She also said she would seek to ensure Britain attains full sovereignty over its borders:
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EUR/GBP forecast for the week of October 24, 2016
The EUR/GBP pair initially tried to rally during the course of the week but turned back around as the 0.90 level above has been so resistive. With this being the case, we ended up forming a bit of a negative candle, and with that it looks very likely that the market looks for the 0.87 level below which was massive resistance in the past and should now be supportive going forward. Any type of supportive candle in that area should be a nice buying opportunity, and we should continue to go much higher.
The case for EUR/GBP longs
How do we profit from a period of EUR/USD drifting lower in its current range as US Treasury yields edge higher, before possibly rising sharply at some point in the next six months, which is impossible to see with any precision?
In spot, our preference is to take advantage of EUR/USD softness to buy EUR/GBP. The risk now is a broader loss of confidence in UK assets amidst political and economic uncertainty that would hurt UK bonds, currency and equities at the same time. That would send EUR/GBP up almost as much as GBP/USD fell.
Two big tail risks, for GBP down and EUR up, can make for a large move in EUR/GBP*. The danger is that now that we have seen the big adjustment in the pound, what we get from here is a tight range with low volatility, but for a directional trade, EUR/GBP looks to have a very big upward skew in the possible outcomes.
It’s only fair to point out that one threat to the UK that shouldn’t be overstated is the dire state of the balance of payments. Yes, the UK current account deficit is running at a quarterly rate of over £30bn, but it will soon improve. The vast bulk of the deterioration, shown in the chart below, comes from primary investment income, which mostly means the balance of income UK companies earn abroad relative to what foreign companies earn in the UK. A weak pound should help correct this, but so should higher oil and commodity prices. A strong pound and soft commodity prices really hit the overseas earnings of big UK-based resource companies, but the sterling price of oil is bouncing fast. This is worth watching, particularly when the 4Q and 1Q current account data are released next year.
SocGen maintains a long EUR/GBP* position from 0.8620 in its portfolio.
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Pound / Euro Rate Forecast to Retain Mild Upside Bias Over Coming Days
The GBP/EUR is on course to take out its next objective - the target at 1.1280 which protects an advance to 1.1530.
Pound Sterling retains the gains made over the Euro over the past week and we believe there is the chance that the short-term relief rally could extend a little while yet.
The gains come amidst signs that the currency has absorbed as much negative news regarding Brexit as is possible in the current circumstances.
“A fast and imminent continuation of the bearish trend at this stage is unlikely because a lot of UK bearishness is already priced in the exchange rate,” says Olivier Korber at Societe Generale.
GBP/EUR has over recent days recovered from the tentative floor it formed in the 1.10251/1.065 region when October's headline-inspired declines eased.
The pair is now slowly rising in a new short-term uptrend.
The extremely long, hammer candle which formed on the day of the crash is normally associated with market exhaustion, especially if it occurs outside the borders of a channel, as it did this time
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Citi: Pound to Euro Exchange Rate has a few More Big Figures to Fall
Expect the consolidation in Pound Sterling to extend a while longer, say analysts at the world's largest foreign exchange dealer, but another big move lower is probable.
Sterling trades within familiar ranges ahead of the weekend as it dances to its own tune and largely ignores data and moves in interest rates.
The currency remains highly sensitive to Brexit-related headlines at present and a ruling by the High Court in Belfast has seen the currency edge lower ahead of the weekend.
The ruling suggests Government is likely to have full control of Brexit negotiations which markets believe could lead to a hard-Brexit.
Despite the falls, at 1.1156 against the Euro and 1.2163 against the Dollar the currency is cacooned well within it's October ranges.
Foreign exchange analysts at Citibank say we should expect the current period of relative stability in the battered British Pound to extend.
However, the message concerning the longer-term is unequivocal - more deep losses lie ahead.
“The current rebound may have further to run but gains are likely capped in the 1.25-1.26 area,” say strategists of the headline GBP/USD exchange rate which also translates into further relief advances in the GBP/EUR cross.
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Euro To Pound Outlook: Eurozone Inflation Fails To Boost EUR GBP Exchange Rate, BoE Volatility Abounds
While currency exchange market risk appetite has been limited at the start of the week, this failed to prevent the Euro losing ground to the volatile Pound Sterling
The Euro has been a soft option during trading today, having failed to rally against a weakened Sterling.
In the Euro’s case, losses triggered by earlier Eurozone and German data have extended over the course of trading, which has prevented any real upwards movement by the single currency.
For the Pound, despite signs that Mark Carney may end up staying Governor of the Bank of England (BoE) until 2021, the impending pessimistically-predicted manufacturing PMI has left Sterling in overall low demand.
A vote of confidence from Prime Minister Theresa May failed to ease market worries over the fate of BoE Governor Carney, with markets still unsettled by the fact that government officials have been so heavily critical of the Governor.
Support for the Pound was equally limited by a disappointing dip in net consumer credit, which suggests that consumer confidence is not as robust as might be hoped.
Confidence in Euro (EUR) exchange rates took a big hit when German retail sales for September were found to have fallen significantly short of forecast, clocking in at 0.4% rather than 1.5%.
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